Thailand Real Estate Reform

May 22, 2017

A proposal to ease restrictions on foreigners buying property in Thailand could spur growth in the real estate market, though uncertainty over new land and building taxes may impact the rollout of new projects.

In late March Apisak Tantivorawong, minister of finance, told local media the government was considering amending property legislation to allow foreigners to lease Thai real estate for up to 50 years, while also permitting them to sell the rights on the properties they have leasehold over.

Under current regulations, foreigners are not permitted to own land in Thailand, and ownership of condominium units is limited to 49% of the overall value of the project.

Foreign businesses that hold rights granted by the Board of Investment – the government’s investment promotion arm – or overseas investors who commit to bringing a declared amount of capital into Thailand are permitted to take out 30-year leases, with the option of extending these for another 30 years.

Positive response

Changes to the property regulations would allow market operators to benefit from foreigners’ growing interest in Thai real estate, according to Kajonsit Singsansern, managing director of developer Siamese Asset.

“As more foreign property buyers converge in Bangkok, developers are constrained in accommodating the demand due to strict laws mandating a maximum of 49% foreign ownership within condominiums,” he told OBG.

According to real estate consultancy Knight Frank’s “Asia Pacific Residential Review” published earlier this year, growth in the Thai capital’s condominium market remained strong last year. More than 52,000 new units were added in 2016, bringing the total to 435,805. However, with demand at 315,393 units, the take-up rate recorded a three-percentage-point drop to 72.4%.

While only representative of 7% of the condominium market, the sub-prime and prime segments saw take-up increase by more than four percentage points to 75.4%, as per Knight Frank figures. The consultancy also reported that 597 new units entered the market in 2016.

With foreign investors often undertaking property purchases via joint ventures with local developers as a way of working around the current restrictions on foreign ownership, any easing of foreign ownership restrictions could see demand in the capital’s condominium market increase further.

New property tax takes shape

As well as considering measures to liberalise the real estate sector, the government is also working to bring a new land and buildings tax into effect by the beginning of 2018.

The legislation, which was approved by the Cabinet in June last year, will replace the Household Tax and Land Act and Community Development Act.

Under the new regime, levies will be placed on purchases of first homes and agricultural land with an appraised value of TB50m ($1.4m) and above. Second home purchases will also be taxed at a rate of 0.03% for homes worth less than TB5m ($145,000) and 0.3% for those valued above TB100m ($2.9m).

The maximum tax rate for agricultural land has been set at 0.2% per annum, at 0.5% for residential properties and at 2% for land used for commercial or industrial purposes.

Meanwhile, a maximum ceiling of 5% for vacant land has been approved as an incentive to develop empty blocks, with the rate rising incrementally the longer the land is left unused.

According to Aliwassa Pathnadabutr, managing director of real estate consultancy CBRE Thailand, the new tax structure could take some of the energy out of the sector, especially if tax rates are excessive and property valuations used as the basis for the levy are incorrect.

“While the previous tax structure was not ideal, it is crucial to ensure that the assessed value under the new scheme is accurate. Many may be forced to sell land in order to generate income,” she told OBG.

Ministry of Finance estimates put the annual revenue from the revised land and buildings tax at around TB60bn ($1.7bn) – three times current revenue under existing laws.

Government mulls windfall tax

The planned changes to land and property levies are not the only new tariffs that could be imposed. When floating the proposal to change leasehold terms for foreigners in late March, the finance minister also signalled the potential for a windfall tax on gains made from property sales.

As proposed, profits on sales of land or property whose value has been positively impacted by state projects – such as large-scale infrastructure developments – will be subject the levy.

Though no rate for the suggested tax has been revealed, it could discourage investment in property developments if investors feel returns will be eroded.